Re-invention key to success at Trader Joe’s

by Tim Linden | November 26, 2012

SCOTTSDALE, AZ — Re-invention was the key to growing Trader Joe’s from a glorified regional convenience store to a nationwide specialty retailer, and that might just be the most important thing in the supermarket business.

At least this was the view of Doug Rauch, who joined the company in the 1970s and was instrumental in its growth, serving as president from 1993 until 2008. Mr. Rauch shared his views of one of the retail industry’s greatest success stories with attendees of the Western Growers Association annual meeting held Nov. 11-14, here.

The chainstore has grown to close to 400 stores across the country and still has somewhat of a cult following. Unlike many of its competitors that often see their expansion plans protested by local activists, each year Trader Joe’s is invited into many more communities than it can join. Mr. Rauch showed a photo of one happy North Carolina customer of a few years ago, holding up sign stating that she had waited 10 years for the store opening she was attending. He said that when the chain has a grand opening, customers typically line up for hours to be the first in the store.

So what led to this success?

Mr. Rauch said it has been the ability of management to buck trends and go its own way, re-inventing the retailing experience and conventional wisdom along the way.

He said that when Joe Coulombe first entered the supermarket business, he did so by creating a small chain of convenience stores in Pasadena, CA, dubbed Pronto Markets.

In May of 1958 the first Pronto Market opened. By the mid-1960s, there were a handful of them serving Southern California, but by then Texas-based 7-Eleven was beginning to expand into California. Mr. Coulombe thought he would have trouble competing against that much better financed operation, so he re-invented his operation and called it Trader Joe’s.

In those early days, Mr. Rauch said that it was fair to describe Trader Joe’s as “a 7-Eleven with a great wine department.” When he joined the firm in 1977, there were nine Trader Joe’s locations and the company had sales of about $12 million annually. The retailer has been on a meteoric rise ever since.

He said that the first big move was to switch to direct buying. Prior to that, the company used a wholesale distributor and thus was limited to carrying the same SKUs that everyone else got. Trader Joe’s switched its buying culture to being “active rather than passive,” and it engaged its suppliers.

“It turns out that knowledge was power,” Mr. Rauch said.

The effort to know the firm’s suppliers and cut out the middleman led to a plethora of unique items that only Trader Joe’s was selling. As it developed a line of new items, the firm also re-invented the concept of private labels. Prior to that, Mr. Rauch said a store label was known as a value proposition that traded a low price for top quality. Trader Joe’s decided that its private label would mean high quality and low price.

Knowing that was a high bar to jump and would be difficult to attain with every item, the firm drastically reduced the number of SKUs that it carried.

“We cut out a ton of SKUs,” said Mr. Rauch. “We went from 6,000 to about 1,300, before we reversed the trend and added a few more to get to 2,000 to 2,500.”

The key was that every SKU had to meet the criteria of high quality and low price and had to have a point of distinction that was different than competitors. For example, he said that Trader Joe’s became the first retailer to sell non-dyed natural pistachios. In those days, all pistachios were dyed red or white to mask the scarring on the shell.

“We became a store of stories,” Mr. Rauch said. “We started looking at manufacturers as partners.”

About 85 percent of the items in the store were adorned with a Trader Joe’s label and every item had a reason to be there.

A big part of the success revolved around the company’s focus on the customer. “It turns out a lot of retailing isn’t customer focused,” he said.

Mr. Rauch said Trader Joe’s constantly engages its customers to find out what they want and how they want it. Most retailers, he argues, do not do this.

“You can’t say you are customer-focused if you are selling your end caps,” he quipped.

In fact, Mr. Rauch said that today many of the larger retailers around the country get more profit by selling space to vendors than selling products to consumers. Naturally, these retailers are more focused on vendors than on their customers.

Disruption is another key to success, and the Trader Joe’s of 1977 is much different than that of 1987, 1997 and today, he said. “All good businesses are constantly re-inventing themselves.”

He added that most businesses fail because they achieve some level of success and “stop monitoring their environment,” which is constantly changing. He said that companies need to adapt or die, and ask themselves over and over again: “What can I do to stay relevant.”

In maintaining relevance, Mr. Rauch said it is very important to create a company culture of change and focus on your own people. “It turns out that culture eats strategy for lunch.”

He explained that if everyone in the company isn’t moving in the same direction, change is difficult. He equated it to an organ transplant that is rejected because it is matched with the wrong blood type. Everything might look good on the surface, but the company culture has to embrace what’s new or it is going to be rejected.

The former executive did admit that one area where Trader Joe’s lags behind is the perishables department. Fruit and vegetable marketing hasn’t been the company’s strong suit, and he clearly struggles to explain why this is the case.

One reason may be that Trader Joe’s has focused on packaged products and he said customers tend to want to buy their produce loose. The company has expanded its produce department over the years, but it is still relatively small.

He urged the shippers to work with his Trader Joe’s successors to find solutions. He indicated that there may be some opportunities in the meal arena, as he said Trader Joe’s has always done phenomenally in providing consumers with meal solutions that require a minimal amount of time in the kitchen.

As an overview of what he thinks success looks like for any company, Mr. Rauch urged firms to “focus, focus, focus.”

He said Southwest Airlines offers a great example of how to be successful. The company has focused on one thing: delivering passengers from point A to point B with little fanfare. It has become the nation’s most successful airline following this formula.